Harvard Management Company, investment manager of the largest U.S. university endowment plan, has been one of the more active users of ETFs among university endowments. The investment firm uses ETFs to access emerging markets funds.In its recent statement of holdings, HMC owns about 20 ETFs — not surprising. It has, however, slashed its exposure to emerging markets ETFs in the fourth quarter, mainly in China and India. This was a very timely choice as you can see from the arrows in the graph bellow, as the most popular Emerging Market ETF (EEM) peaked on December 28, 2012 and has since retreated 6%.
Starting with Latin America, HMC reduced its exposure to Mexico via EWW by 25% in the fourth quarter of 2012. The endowment plan manager also lowered its stake in the Brazil (EWZ) by 8% last quarter. It further reduced its positions in Chile by 13% and liquidated its entire stake in the iShares S&P Latin America 40 Index Fund (ILF).
Looking back it appears HMC made a timely move when it slashed its investment in the iShares FTSE China 25 Index Fund (FXI) by 44% in the fourth quarter. FXI has been hit hard since February 1, 2013. HMC got even more bearish on India and Poland, liquidating all of its positions in the highly-traded WisdomTree India Earnings ETF (EPI). HMC also cut its investment in another India fund (INP) by 48%. It eliminated its holdings in iShares MSCI Poland Capped Investable Market Index Fund (EPOL). We held on to EPI for most of our clients thru mid January 2013, but sold off as EPI peaked. EPI is now down about 12% from its January 2013 top, as you can see from the chart below.
In other parts of Asia, HMC lowered its stake in the South Korea (EWY) by 18%, but left unchanged its investments in the Malaysia Index (EWM), which has recently pulled back to a potential entry point, the Philippines (EPHE), and Indonesia ETF (IDX). Indonesia is HMC’s fifth largest holding.
However, while HMC was busy reducing exposure to emerging markets ETFs, it did add to some of its U.S.-focused positions. HMC specifically chose the iShares Core S&P 500 ETF (IVV) rather than the more broad based SPY to increase investments. It also moved money into the iShares Russell 2000 Index Fund (IWM), a more aggressive bet on US equities. HMC added more money to Vanguard Dividend Appreciation ETF (VIG), the largest dividend ETF by assets. Probably looking to reduce fees, HMC switched a large stake in the iShares MSCI EAFE Index Fund (EFA) to Vanguard MSCI EAFE ETF (VEA). Both track Europe, Asia and the Far East equity markets.
HMC was also active with commodities funds during the fourth quarter, reducing positions in the PowerShares DB Agriculture Fund (DBA) and the PowerShares DB Energy Fund (DBE). While bearish on agriculture and energy, HMC added to positions in the PowerShares DB Base Metals Fund (DBB) and thePowerShares DB Precious Metals Fund (DBP). The DBA and DBE seem to be timely choses as inflation remains subdued, but the metal funds have hurt returns. Metal stocks have continued to lose ground as equities rally.